Speculation might be hurting ethanol market

Sep. 28, 2013

Debbie Stabenow

Written by

Christopher Doering

WASHINGTON — The head of the Senate Agriculture Committee asked the country’s futures regulator last week to review allegations of manipulation in the market for special credits tied to ethanol.

In a letter to the chairman of the U.S. Commodity Futures Trading Commission, Sen. Debbie Stabenow, D-Mich., said a review of the unregulated market is necessary to preserve “integrity” for so-called Renewable Identification Numbers, or RINs.

Congress created RINs, a special serial number given to batches of biofuels before they are sold to refiners and gasoline importers looking to comply with a federal mandate to use a certain amount of ethanol. Instead of blending ethanol, the refiner can choose to purchase RINs.

South Dakota, the country’s fifth-largest renewable fuels producer, generated more than 1 billion gallons of ethanol in 2012.

Allegations have surfaced that Wall Street firms are looking at the credits as an investment, helping to drive up the price of RINs. When the credits were created, they were viewed by Congress as a way for refiners and others tied to ethanol to comply with the mandate. Lawmakers did not intend for speculators to get involved in the market.

“I would like the CFTC to help determine whether factors other than supply and demand have been causing extraordinary volatility in the price of RINs and to what extent fraud and manipulation have been affecting the price of RINs,” Stabenow wrote in a letter to Gary Gensler, chairman of the Commodity Futures Trading Commission Chairman.

“I am concerned that a lack of transparency in these markets has made them more susceptible to manipulation. If this is the case, it is a problem that must be identified and fixed,” she said.

Prices for the credit have been volatile this year as more ethanol is required to be blended into the country’s motor fuel supply. RIN prices started the year at a few cents, before spiking to more than $1.40 in July. They are now hovering at around 60 cents each. Energy refiners have warned that the impact of RIN credits could be felt by consumers at the pump through higher gas prices.

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Steve Adamske, a Commodity Futures Trading Commission spokesman, declined to comment on the letter, but said the agency would respond to it. Bart Chilton, a Democratic commissioner at the agency, said last week it was reviewing the recent volatility in the RIN market.

“I see no reason for the spikes, and we are examining” it, Chilton said. The CFTC would have jurisdiction because ethanol contracts are being affected by the credit.

An Iowa State University study released last week said the cost of installing tanks to handle fuel with 85 percent ethanol could be cheaper than buying energy credits to avoid blending the fuel mostly made from corn. Iowa State professor Bruce Babcock said ethanol demand would increase by 800 million to 1 billion gallons for every 2,500 stations with E85 fueling capabilities.

Meanwhile, the Environmental Protection Agency is studying whether to lower the biofuels mandate next year. The oil industry has said as motorists drive less and cars become more fuel efficient, it’s harder for them to blend as much of the corn-based fuel as they are required to by law. That challenge, the oil groups argue, has forced refiners to go out and purchase RINs.

The head of Valero, the third-largest U.S. corn-ethanol producer and the nation’s largest independent refiner, told Senate lawmakers in July that it could cost the company as much as $800 million for ethanol credits to comply with the mandate. The Texas-based company operates an ethanol plant in Aurora, S.D.

Most fuel used by motorists now contains 10 percent ethanol and 90 percent gasoline.